On April 19, 2016, the United States Supreme Court heard oral argument on the viability and breadth of the “implied certification” theory of the False Claims Act (“FCA”). The implied certification theory supports FCA liability for claimants who violate a statute or regulation that governs the substance of the claim they submit to the government. Eight circuits courts have held that the implied certification theory is viable, but the Seventh Circuit recently rejected the theory. Circuit courts also disagree as to the proper application of the theory, with the Second and Sixth Circuits limiting its use to those violations of statutes or regulations upon which payment is “expressly conditioned.” The Supreme Court is considering these two issues in Universal Health Services, Inc. v. United States ex rel. Escobar, an appeal from the First Circuit Court of Appeals.
Escobar was filed as a qui tam action by the parents of a child who died while under the care of a mental health clinic whose services were reimbursed by Massachusetts Medicaid. The parents alleged that care at the clinic was provided in knowing violation of Medicaid regulations that require staff members to be properly licensed, qualified, and supervised. They argued that these violations of Medicaid regulations constituted a “legally false” claim under the FCA.
The district court acknowledged that the implied certification theory—where violation of a statute, regulation or contract constitutes a fraudulent request for payment under the FCA—was recognized in the First Circuit. Nevertheless, the district court dismissed the parents’ lawsuit because they had failed to identify a regulatory violation upon which the Medicaid payment to the clinic was expressly conditioned, noting that “not every regulatory violation gives rise to a potential FCA action.”
The parents appealed to the First Circuit, which reversed the district court’s decision. The First Circuit held that the parents sufficiently had alleged that the clinic submitted a claim for which it knowingly misrepresented compliance with a material condition of payment.
The clinic then asked the Supreme Court to hear the case. Several powerful health care industry players, including the Pharmaceutical Research and Manufacturers of America and the American Hospital Association, filed amicus briefs arguing that the Court should narrow the scope of the implied certification theory. During the oral argument, Justice Breyer distilled the concerns of many amici when he asked: “How do you distinguish those regulations, breach of which are fraudulent when you breach them, and implicit[ly] promise not to, from those that [are] not? There are millions of regulations.”
The Supreme Court now has the opportunity to significantly cut back on the number of FCA suits if it holds that the widely used implied certification theory is not viable. Even if the Court deems the theory viable, the Court’s decision could still limit the number of future FCA claims by concluding that the theory only permits lawsuits based on violations of statutes or regulations upon which payment was “expressly conditioned.”
